This ongoing decline in NIM is forcing Wells to issue ever more loans
to maintain its average loan/yield constant. As the chart below shows,
it is doing just that, with period end loans outstanding soaring by
$86BN from a year ago to $947.3BN.

All of that, however has to do with the structural constraints of the economy, and the ongoing collapse in rates.
What about Wells' overall credit book? Here we find some curious observations here. Net charge-offs rose to $886 million, up $55 million, or 7%, LQ on $87 million higher oil and gas portfolio losses.
And yet, despite the abovementioned $17.8 billion (as of Q1) in loans
to oil and energy and despite the deteriorating conditions, Wells only
built reserves by a paltry $200 million reserve build in the quarter,
resulting in a 0.38% net charge-off rate "as continued improvement in
residential real estate was more than offset by higher oil and gas
reserves." Will that reserve
Still it wasn't just energy related losses: Wells also revealed that
commercial losses were 20 bps, up 4 bps LQ. while consumer losses of 57
bps, up 1 bp LQ
Just as interesting was Wells' disclosure of its Non performing
assets, which jumped by $706 million to $13.5 billion, the biggest such
increase since the crisis.
This was Wells' explanation:

Nonaccrual loans increased $852 million on $1.1 billion higher oil
and gas and $343 million from the addition of GE Capital loans,
partially offset by lower residential and commercial real estate
nonaccruals

Acquired loans and leases from GE Capital acquisitions were marked
to fair value in purchase accounting with no Allowance recorded with the
closings

Future allowance levels will be based on a variety of factors,
including loan growth, portfolio performance and general economic
conditions

Finally, we get to the real meat - Wells' Oil and Gas loan portfolio and total exposure. Here are the details:Oil and gas loan portfolio of $17.8 billion, or 1.9% of total loan outstandings
The total outstanding amount was up $474 million, or 3%, from the
$17.4 billion in 4Q15 on drawn lines and the acquisition of $236 million
in loans from GE Capital
Outstandings include $819 million second lien and $374 million of mezzanine loans
Wells reports that ~7%, or $1.2 billion, of outstandings to
investment grade companies. This means that $16.6 bilion of Wells'
outstanding loans are to junk-rated companies, something we flagged four months ago.
* * *
On the other hand, total exposure of $40.7 billion was down $1.3 billion, or 3%, reflecting declines across all 3 sectors from reductions to existing credit facilities and net charge-offs. As expected, Wells has decided to start trimming it overall exposure by collapsing credit lines.
But the punchline once again, is in the reminder of just how generous
Wells has been in lending to junk-rated oil and gas companies in the
recent past to compensate for its declining NIM: Wells reported that
~22%, or $8.8 billion, of exposure to investment grade companies, which means $32 billion is to junk-rated companies.
It also means that much more pain is in store for Wells in the coming quarters unless oil stages a dramatic comeback.
* * *
At this point Wells give an update of what it actually did in the first quarter.
First, it increased net chargeoffs by a paltry $204 million in 1Q16, up $87 million from 4Q15, "driven by deterioration in borrower financial performance and collateral values reflecting lower crude and natural gas prices"
While it did not need to explain, it adds that "all of the losses were in the E&P and services sectors Nonaccrual loans"
More troubling was the spike in Nonaccrual loans which more than doubled to $1.9 billion, up $1.1 billion from 4Q15 on "higher
outstandings, weaker expectations for borrower cash flows reflecting
lower collateral values, the run-off of hedges, less sponsor support and
the closing of external liquidity sources, as well as protective draws" Once again, nearly all nonaccruals were in the E&P and services sectors.
Curiously, about 90% of nonaccruals remain current on interest and
principal. This means that if and when the borrowers hit their funding
cliff, the consequences will be severe.
Finally, Wells reports that it has taken $1.7 billion of allowance
for credit losses allocated for oil and gas portfolio, which amount to
9.3% of total oil and gas loans outstanding.
So, here is the recap: $1.1 billion in reserves provisions (an
increase of only $200MM in the quarter), a total of $1.9 billion in
non-performing Oil and Gas assets, a $1.7 billion allowance for Oil and
Gas credit losses, and a total of $32 billion in junk rated oil and gas exposure?
Something tells us that top chart showing Wells Fargo's declining net income will not get much better any time soon...Source: Wells Fargo